Consider 3-month European-style options written on a non-dividend pay- ing stock. The current stock price is 60, the expected return on the stock is 10%, the return volatility of the stock is 40%, and the risk-free rate of interest is 6%. (a) (10 points) Calculate the theoretical value of a 3-month call and 3-month put with exercise price of 60. (b) (15 points) Suppose you buy a straddle using the 60-call and 60-put, assuming the prices of these options are at their theoretical values. Compute analytically (i) the breakeven stock prices at the option's expiration, (ii) the risk-neutral proba- bility that the straddle will be pro table, and (iii) the real-world probability that the straddle will be pro table

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2. (25 points) Consider 3-month European-style options written on a non-dividend pay- ing stock. The current stock price is 60, the expected return on the stock is 10%, the return volatility of the stock is 40%, and the risk-free rate of interest is 6%. (a) (10 points) Calculate the theoretical value of a 3-month call and 3-month put with exercise price of 60. (b) (15 points) Suppose you buy a straddle using the 60-call and 60-put, assuming the prices of these options are at their theoretical values. Compute analytically (i) the breakeven stock prices at the option's expiration, the risk-neutral proba- bility that the straddle will be profitable, and (ii) the real-world probability that the straddle will be profitable